Answer to Question #228926 in Microeconomics for Cebo

Question

Explain one problem associated with using gross domestic product as a measure (8) of economic growth. Include in your answer a proposition of how to overcome the problem mentioned.

Answer 1

The main problem associated with the measurement of GDP is the problem of externalities.

Externalities are the costs or benefits of an economic activity and is not reflected in the final cost or benefit of products and services. Externalities make markets inefficient and majorly causes market failures.

The solution is imposing heavy taxes on products that result in externalities and providing subsidies to stimulate vital activities.